Accurate measurement of university costs is essential

INSIGHTS & RESOURCES

Accurate measurement of university costs is essential

The Australian
by KEITH HOUGHTON
10 April 2024

There is growing anticipation that the federal government’s response to the Universities Accord review’s final report will come soon. Given this and the fact that the budget is less than a month away, it is timely to review one of the final report’s key insights.

The insight goes to the heart of higher education funding and is crucial if the university sector is to strengthen its financial sustainability.

This lesson hinges on certain key words in Chapter 6 of the final report: “To deliver the revised new funding model for learning, teaching and scholarship successfully, the system requires a significantly improved understanding of the efficient cost of delivering specific courses of study at individual providers and across the higher education sector at large …”

These words are important because a sizeable portion of government university funding depends on the measurement of teaching costs. These costs have been at the centre of higher education both before and since the HECS system was created. The final report is correct in its criticism of conventional cost measurement approaches.

There are multiple sources of cost measurement error. The final report notes that funding is based on a “set and forget” approach “which ignores changes in the shifting cost between courses and across the system”.

The Higher Education and Research Group was commissioned by the accord review to undertake research on university costing issues. While the results of that work are not able to be discussed here, material from earlier and very recent research by HERG is relevant and provides some potentially useful insights.

Firstly, the “set and forget” approach to costing will likely not deliver needed outcomes. Costing is dynamic and granular. Some universities have strong cost-efficiency advantages in some activities (such as research in astrophysics or medicine). A few have a strong cost-efficiency advantage in many fields of research.

Others have cost-efficiency advantages in the teaching of, say, engineering, science, law, or allied health, to name just four. At some level, the current approach inevitably drives “sameness” across all of them and denies universities the opportunity to specialise in activities for which each has comparative strength.

Secondly, measurement error has created a situation where the full cost of some courses (for example, veterinary science) is underestimated. If this is not true, why do we have so few veterinary science programs and a shortage of these graduates?

We also see an abundance of law and business programs. All public universities have a business program; all but one have a law school. Are these seemingly perverse outcomes affected by funding arrangements reflective of errors in the measurement of true teaching costs?

The empirical evidence is that the funding mechanisms have created some unintended and perverse outcomes.

Is the esteem of the university system being degraded because of the shortage of graduates in some disciplines, and an oversupply in others? The esteem of universities is further damaged if, as a consequence of underfunded HECS places in areas of shortage, all that is on offer to domestic students are fee-paying programs. Surely there is a powerful argument that there are significant benefits for many stakeholder groups if universities were funded at the full true cost of teaching all courses.

Thirdly, there is an error that can go unacknowledged by external consultants (or even some university CFOs) which occurs at both whole-of-sector and individual university levels. This error goes to the very essence of universities as, by definition, they have not one but two “products” – research and teaching. One is not a by-product of the other – they are both crucial.

The current costing approach cannot validly separate the true costs of teaching from the true costs of research. This creates distortions. Decisions on teaching and research routinely use data suffering from mis-estimates. Misallocation of resources becomes inevitable. Productivity is affected.

The failure to validly separate the true costs of teaching from the true costs of research is the single biggest error in the measurement of university costs.

In combination, these errors create the need for opaque or even hidden cross-subsidies that only exacerbate the challenges faced by the sector and individual institutions.

It is essential to move beyond current cost measurement techniques and this is endorsed by higher education heavyweight Bruce Chapman, including in a recent article in The Australian. The mantra still voiced by some that “Everything will be all right if we just have some more money” does not cut through anymore. The current situation does provide universities themselves with an opportunity to lead some of the reforms needed.

The accord final report states: “Universities would … benefit from feedback on patterns of costs.

“A transparent approach to best practice management would enable universities to achieve efficiencies … maximising available resources allocated to … teaching and research.”

The key message for universities, both individually and collectively, is that valid and reliable costing evidence will provide a pathway to deliver material productivity gains and cost efficiencies. There is a burning platform; the opportunity for real change is now.

Keith Houghton is Chief Academic Strategist of the Higher Education and Research Group.

Recently released analysis finds that one large Group of Eight university outperformed other public universities in its research and education productivity outcomes during the pandemic.

The joint and common cost problem arises where there are two or more outputs that arise from costs that are shared in the production of these outputs. In many situations, the ability to assign costs to these two or more outputs is not complex. But there are instances where it is highly complex. In these situations, there is a need to use advanced analytics to provide a valid and reliable estimate of costs.

The need to measure costs and productivity in higher education is crucial for the effective and efficient use of resources.

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